The gold is leased to a bullion bank, which typically pays one percent interest to the Fed, with a promise to return it on a specified date. The bullion bank then sells the gold on the open market and uses the proceeds to buy Treasury bonds, which will net a three to four percent return.

The nicest thing about such an arrangement is that the lessor continues to claim it on his balance sheet as a line item: “gold and gold receivables.” After all, an asset that we have leased out is still an asset, even if it has now been sold by the lessee.

In effect, this means that, if you bought a gold bar today, it is possible that it is a bar that was shipped from the Bundesbank to the Federal Reserve decades ago and is presently listed by the Fed on its balance sheet as “gold and gold receivables.”

The problem for the Global Central Banking System is not that the same physical gold is on two (or more) balance sheets, it is that the loss of the “money” created by the leasing used to buy Treasury bonds.

Nations want to make sure they hold their gold if the bond markets collapse/contract. Nations in possession of their own gold can refuse to give it up to any leasers. Gold held by the trusted central banking system may be moved without a nations knowledge. They have a perfect right to be nervous. I would be.

The spin, the spin on the CONTRACTION in GDP this morning is truly priceless. Contraction has finally reared its ugly head last quarter as John Williams and other has been saying for some time now with their real stats. Really, we never had a recovery.

Call it what you will, GDP contracted last quarter and no manipulating of official stats could hide it.

However, brilliant economists everywhere say, no fear, because….

Economists said the surprise decrease in the nation’s gross domestic product wasn’t as bad as it looked. The weakness was primarily the result of one-time factors. Government spending cuts and slower inventory growth subtracted a total of 2.6 percentage points from growth.

Those volatile categories offset a 2.2 percent increase in consumer spending, up from only 1.6 percent in the previous quarter. And business spending on equipment and software rose after shrinking over the summer.

“Frankly, this is the best-looking contraction in U.S. GDP you’ll ever see,” Paul Ashworth, an economist at Capital Economics, said in a note to clients. “The drag from defense spending and inventories is a one-off. The rest of the report is all encouraging.”

Groovygirl is confused, how are government spending and defense cuts a one-off? Do they know of a new war somewhere the US is going to engage in?

The US is in major debt, the bond market is under pressure, the Fed’s “printing” produces less and less, and the politicians keep kicking the “cliff” down the road. GG sees no increase in government spending, but a continued decrease.

GG also completely attributes the increase in consumer spending on inflation in prices and nothing else. (Real inflation rate is 10%.)

This contraction must continue, the only way it can (at least) net out is further inflation in prices.

Boeing’s new Dreamliner is the perfect textbook example of why outsourcing doesn’t work. Not only does it mean fewer, if any, design and manufacturing jobs in the US, it produces a shoddy product that goes over budget anyway.

Like anything else, outsourcing has a break-even point. Boeing just learned that the hard way. That is one of the problems with the American way of thinking: if it works, do even more of it. That is not how anything in economics, investing, labor, business, education, health, exercise, food, Fed, anything, works. Nothing. There is a point on any line where best way moves to less and then worst. It’s a bell curve. But humans are greedy and they always topple from the height of the top of the bell curve or tipping point. It’s a shame.

GG has mentioned this concept before in describing the 2007 housing market crash. There is a point when you run out of people to buy houses. Even non-living people. Just as there is a tipping point in the number of facebook users. And ipod users. TV and radio manufacturers went through the same tipping point.

Even gold buyers…but we are not there yet 🙂

A high in any cycle or wave is usually 2 or more tipping points coming together. The more of the tipping points coming together at the same time, the worst the low that is following.

January 29, 2013

So, grooygirl went to the Mises Institute Circle in Houston last weekend. Click here.

Mises Institute promotes the understanding and education of the theory of Austrian Economics. It was a good conference. The most encouraging thing was the large number of young people there. They certainly understand that the current economic system is not working.

Tom Woods, one of the speakers, talked about the problems of QE to infinity and government fiscal stimulus plans. The worst problem being that the spending is never targeted toward promoting spending that will develop real economic activity. It is geared toward either pet government programs or no direction at all, thus another bubble is created intentionally or unintentionally.

Current bubble targeting the auto industry and the T-bond market.

Groovygirl gained a better understanding of the concept of relative prices and relative demand and its effect on the real economy. It is a deeper concept, but under the same umbrella as what gg has stated before about the every increasing gap between wages and prices. And how that widening gap slows and stops the real economy despite government spending and QE and distorted stats.

This also distorts relative wages and underemployment. Willy-nilly government spending sends money into bubbles, causing middle and low-income job wages to collapse. Government uncertainty, such as the ever-moving timeline of the debt ceiling causing uncertainty for business. I think we have all seen this in the last 2 years.

Until these issues are addresses, business and expansion will stall.

Here is another illustration of how Gov/Fed spending approach does not work in achieving full employment from Of Two Minds. As you can see, the Fed’s low rates since 2002, has not created more jobs in respect to population.